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On Student Loans Personal Finance Student Loan Fact Sheet Series Recovering from Student Loan Default Carrie L. Johnson, Ph.D. | North Dakota State University Failing to make regularly scheduled student loan Federal employees face the possibility of having payments can have a very negative effect on a 15% of their disposable pay reduced by their consumer’s life. Federal loan servicers report employer to pay back student loan debt. delinquencies of at least 90 days to the three major It will take years to reestablish your credit and credit bureaus (Equifax, Experian, and recover from default. TransUnion). Default occurs when an individual fails to make a student loan payment for more than Avoiding Default 270 days. For private loans, each lender will have If you are having difficulty making student loan different rules. This fact sheet will focus on rules payments, it is essential to be proactive and avoid regarding federal student loans. going into default. By contacting your loan servicer, you may be able to switch repayment plans, change Consequences of Default your payment due date, or get a deferment or The consequences of student loan default can be forbearance. financially devastating. Below is a list of default consequences as stated on the Federal Student Aid A deferment is a postponement of payment on your website (https://studentaid.ed.gov/sa/repay- loan that is allowed under certain circumstances. loans/default). Interest on Subsidized loans is also postponed. You The entire balance of your loan and interest is qualify for a deferment in the following situations: immediately due and payable. During a period of at least half-time enrollment You lose eligibility for deferment, forbearance, in college or career school. and repayment plans. During a period of study in an approved You lose eligibility for additional federal graduate fellowship program or in an approved student aid. rehabilitation training program for the disabled. Your loan account is assigned to a collection During a period of unemployment or inability to agency. find full-time employment (up to 3 years). The loan will be reported as delinquent to credit For Perkins Loans, during a period of service bureaus, damaging your credit rating. qualifying for Perkins Loan Your federal and state tax refunds may be discharge/cancellation. intercepted and used to repay debt. During a period of economic hardship (as Your student loan debt will increase because of defined by the Department of Education). late fees, additional interest, court costs, During Peace Corps service (for up to 3 years). collection fees, attorney’s fees, and other costs During a period of active duty military service associated with the collection process. during a war, military operation, or national Your employer can garnish your wages. emergency. The loan holder can take legal action against During the 13 months following the conclusion you, and you may not be able to purchase or sell of qualifying active duty military service. assets such as real estate. MultistateThisMultistateMultistate publication Research Research is an Group outputGroup Group NC2172 ofNC2172 NC2172the multistate Behavioral Behavioral Behavioral research Economics Economics projectEconomics and andNC2172 Financial Financial and Behavioral Financial Decision Decision -Economics makingDecision-making and - andandmaking Information InformationFinancial and InformationManagement Decision Management-Making AcrossManagement Across and the informationthe Lifespan Lifespan Across, partially Management, thepartially Across the Lifespan. The activities of NC212 are partially supported by the National Institute of Food and Agriculture (NIFA). At the time this publication supportedLifespansupported by, partially the by Nationalthe National supported Institute Institute by of theFood of NationalFood and andAgriculture InstituteAgricul ture– ofNIFA –Food NIFA at theand at (seethe Agriculture (see alphabetical alphabetical – NIFAlist) list)and at and thethe U.S.the (see U.S. Department alphabetical Department of Agriculture.list) of Agriculture. and the · U.S.Iowa · Iowa State State was created, the participating universities in alphabetical order were Iowa State University · Kansas State University · North Dakota State University · UniversityDepartmentUniversity · Kansas ·of Kansas Agriculture. State State University University · Iowa · North State · North Dakota University Dakota State State University· Kansas University State· Pennsylvania · PurdueUniversity University State · Purdue University · Rutgers University · Purdue University ·University Rutgers · South University · DakotaRutgers State University · South University Dakota· South · The Pennsylvania State University · Purdue University · Rutgers University · South Dakota State University · University of Delaware · University of Florida · DakStatePennsylvaniaota StateUniversity University State · UniversityThe · University Pennsylvania · University of Delaware State of DelawareUniversity · University · University · Univeof Floridarsity of ·Florida Universityof Delaware · University of Georgia · University of Georgia· University of · FloridaUniversity of Illinois · University of ·Illinois University ·of Universi Georgia of Marylandty of· UniversityMaryland · University · ofUniversity UniversityMissouri of · of UniversityGeorgia Missouri · Universityof · UniversityRhode Island of Illinoisof Rhode· University · University Island of · Universitythe of Incarnate Maryland of Wordthe · University Incarnate · Utah StateWordof Missouri University · Utah · State University · Virginia University of Polytechnic Rhode · Virginia Islan Institute dPolytechnic · University and StateInstitute of the University Incarnate and State of Illinois · University of Maryland · University of Missouri · University of the Incarnate Word · Utah State University Word · Utah State University · Virginia Polytechnic Institute and State UniversityUniversity | Personal Finance Forbearance is a way to postpone your payments for Loan Repayment up to 12 months if you do not qualify for a One option for getting out of default is to repay the deferment under one of the conditions listed above. full amount of your defaulted student loan. Perhaps Interest still accrues on all loans during a from a large lump sum such as a tax refund or an forbearance period. There are two types of inheritance. forbearances: discretionary and mandatory. Loan Rehabilitation In a discretionary forbearance, your lender decides To rehabilitate your loan, you must contact the whether to grant it or not. You can request a Department of Education and agree upon a payment discretionary forbearance for financial hardship or amount and make nine full payments. Payments illness. secured on an involuntary basis (wage garnishment, litigation, etc.) do not count toward the nine A forbearance which your lender is required to payments. Once you have made the payments grant is called a mandatory forbearance. You can (within 20 days of their monthly due dates) your request a mandatory forbearance for the following loans will no longer be considered to be in default reasons: status. You can rehabilitate a defaulted loan only Serving in a medical or dental internship or once. residency program, and you meet specific requirements. Loan Consolidation The total amount you owe each month for all A third option is to consolidate your federal student the student loans you received is 20% or more loans. A defaulted loan may be included in a of your total monthly gross income. consolidation loan after you make satisfactory Serving in a national service position for which repayment arrangements on the defaulted loans with you received a national service award. the current loan holder or you agree to repay the Performing teaching services that would qualify new Direct Consolidation Loan under either the for teacher loan forgiveness. Income Contingent or Income-Based Repayment Qualifying for partial repayment of your loans Plans. under the U.S. Department of Defense Student Resources Loan Repayment Program. eXtension Student Loans: You are a member of the National Guard and http://articles.extension.org/pages/72895/student- have been activated by a governor, but you are loans not eligible for a military deferment. Federal Student Aid: https://studentaid.ed.gov/sa/ Getting Out of Default When borrowers default on their federal student loans, they have three options: loan repayment, loan rehabilitation, and loan consolidation. The material provided by eXtension comes from many sources and is for informational purposes only. Mention of a trademark, proprietary product, or commercial firm in text or figures does not constitute an endorsement by the Cooperative Extension System and Page 2 does not imply approval to the exclusion of other suitable products or firms. It is not intended to be a substitute for personalized eXtension.org | Issues · Innovation · Impact professional advice. For specific local information, contact your local county Cooperative Extension office or other qualified professional. NC2172-008-08.2016 .
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